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India’s (Overhyped) Inequality

A recent report by Oxfam International on income inequality has captured everyone’s attention. What’s captured headlines across various news outlets in India is a small sliver of a very large report. News flashes such as, “Income inequality gets worse; India’s top 1% bag 73% of the country’s wealth, says Oxfam” designed to essentially freak people out and increase hits.

India’s media has a long running problem when it comes to stoking mass turmoil, creating confusion and subjective reporting, but that’s not why we shouldn’t freak out. Income inequality has a lot to do with regulation, regulatory capture and rent seeking, but those are the things that you’ll see allocated the least amount of blame. If regulation is mentioned, you’ll hear people advocating for increasing regulation, which in turn creates a more opaque system with such complexity that only those with the know how will profit.

Responses to inequality usually range from tirades against globalization, immigration, and Wall Street. You might be perfectly entitled to allocate blame towards all three, but they don’t come close to having the effect rent seeking has had on inequality. It’s a topic that needs to be discussed at length until a solution is found.

The reason why we shouldn’t worry too much about the Oxfam report is the Kuznets curve. Named after Nobel Prize winning economist Simon Kuznets, it hypothesizes why high growth will lead to rising inequality at first, then flatten out, and eventually decrease in an inverted U-shape trajectory. One explanation of the curve involves investment opportunities that are primarily available to those with wealth during the initial phase of a developing economy and thus has a multiplier effect on the wealth for those who’ve already invested (a first mover’s advantage). The multiplier effect/first mover’s advantage is even more profound given the role inherited wealth plays in India.

A majority of India’s top 1% have inherited their wealth from earlier generations, and thus a sizeable portion of their current wealth was created when India was in that initial phase of being a developing economy. The second explanation takes into account the rural-urban divide you see when the center of an economy moves from rural areas (primarily agriculture based) to a more urban setting, where wages in rural areas decline as a result.

Kuznets’ work has come under a lot of flak recently, owing to rising inequality globally in developed economies, but as you’ve probably figured out, rather than call into question Kuznet’s work, I’m more inclined to blame rent seeking. Mostly, because the “scale” of rent seeking we see today in developed and a few developing economies is unprecedented. Developing economies in question, consist of those where the beneficiaries of growth are oligarchs. The trends of increasing oligarchies and rent seeking weren’t as obvious in the 1950s, but Kuznets’ work has largely stood the test of time. So while you might see a lot of articles written in the next week blaming inequality on the government’s economic policies and the Prime Minister himself, keep in mind that the rising inequality is a natural progression.

While India’s Gini coefficient (a measure of income distribution) rose from 45 to 51.4 in 2016, signaling an increase in income disparity between rich and poor, China’s Gini coefficient rose from 33 to 53 in the same period, an astounding figure even in absolute terms. You might also see reports of how during the UPA years the gap wasn’t as wide, but if you take into account Kuznets work, that necessarily isn’t a good thing. It might just mean that during UPA’s second term, growth wasn’t high enough to cause an absolute rise in incomes for the wealthy, but growth wasn’t low enough for them to lose a massive chunk of it either, hence the stagnation.

India most definitely came out better from the financial crises than most developed economies in relative terms, where one-third of the lower middle class/poor ended up with zero or negative wealth, but that’s not something to pat ourselves on the back for. We still have a lot of work to do when it comes to fulfilling our potential, but inequality shouldn’t give us sleepless nights just yet.